SAN FRANCISCO (CN) – Facebook found itself in front of a federal judge on Thursday who seemed unimpressed by its argument that it is entitled to appeal an IRS determination that it undervalued its asset transfers by roughly $7 billion when it set up an overseas headquarters.
Presumably, Facebook was using a strategy called the “double Irish arrangement,” whereby large U.S. corporations avoid paying substantial federal tax bills by setting up an Irish subsidiary as a tax haven.
At Thursday’s hearing, the social media giant urged U.S. District Judge Laurel Beeler to send the tax case to the IRS Office of Appeals to work out a possible settlement, even though Facebook says the agency denied its request for the alternative forum back in 2016.
“This is a flat ‘no,’” Facebook attorney Scott Frewing told Beeler. “Our understanding from our communication is it was not just ‘no,’ but ‘heck no.’”
Frewing said the Taxpayer Bill of Rights enacted by Congress in 2015 allowed taxpayers to appeal IRS determinations to an independent forum within the IRS. This expanded on the The Internal Revenue Service Restructuring and Reform Act of 1998, which made it clear that access to IRS appeals is a right, Frewing added.
“The IRS’ position in this case is [it] can choose any arbitrary position it wishes to deny access to IRS appeals,” Frewing said. “We don’t think that can be the right answer, particularly after Congress passed the Taxpayer Bill of Rights in 2015.”
James Weaver with the U.S. Department of Justice argued on the IRS’ behalf that Facebook is not entitled to seek a more favorable settlement with IRS employees in its Office of Appeals rather than IRS Tax Court.
He vehemently disagreed with Frewing that Congress intended mandatory access to IRS appeals.
“No one was thinking there was just an automatic ticket, guaranteed access to IRS appeals,” Weaver said. “When you’re in tax court, IRS should be able to manage its docket the way it sees fit. There is no statutory basis to say ‘yes, you have a statutory right to go to IRS appeals.’”
Thursday’s bout of legal wrangling stems from a probe the IRS launched against Facebook in 2013 over its tax liability for 2008, 2009, and 2010, in which it found Facebook had understated its transferred intellectual property assets by about $7.1 billion, “resulting in a substantial under-reporting of income for U.S. tax purposes in 2010 and later years.”
In 2016, the agency filed a petition to force Facebook to turn over tax records it withheld as privileged and confidential.
Last month, Beeler ruled that the government can view up to 15 of the 153 disputed documents in her chambers. The parties are currently set to meet in court in May.
As for Facebook’s tax case, Beeler said she understood its frustration, but didn’t see how the provisions Frewing quoted from the 2015 statute add up to entitlement.
“I’m having a really tough time figuring out how the 2015 amendment creates an enforceable right,” she said. “Show me entitlement. It doesn’t seem to me that the provisions create the enforceable right that you’re advancing.”
Frewing said that even if Beeler threw out the entitlement argument, the Administrative Procedure Act allows Facebook to challenge any agency action made arbitrarily and capriciously, which he says the IRS did here by not giving Facebook a reason for its denial.
“The agency here has not explained its position,” Frewing said.
Weaver said the IRS chief counsel has full discretion to decline a request to transfer a tax court case to its appeals office.
Beeler, who took the arguments under submission, said the inquiry is whether there’s enough to show that the IRS acted arbitrarily.
“There’s enough in the record to show it was within division counsel’s sound discretion,” she said.